Canary in the coal mine: will unfair contract terms be outlawed?

Treasury’s 50 page Consultation Regulation Impact Statement (RIS) regarding the unfair contract term regime for small business is 50 pages long. Like most such documents, it is a little dry. It sets out problems, identifies possible solutions, and invites submissions about what should be done. So far, so bureaucratic.

But for ACL buffs, this particular paper is a doozy. Reading between the lines, it seems to suggest that – almost a decade after the unfair contract term (UCT) regime for consumer contracts was introduced – UCTs may soon be outlawed once and for all. It also provides an interesting lesson in how a consultation process can point towards a particular outcome.

Background

In 2010, the unfair contract terms regime for standard form consumer contracts was introduced. In 2016, the regime was extended to small business contracts that meet certain criteria: a standard form contract (as defined), where one party is a business with fewer than 20 employees, and the price payable is below a certain threshold.

For both consumer and small business contracts, the ACL provides that a term is unfair if it causes a significant imbalance in the parties’ rights and obligations, is not reasonably necessary to protect the legitimate interests of the party relying on it, and would cause detriment if relied upon. Significantly, the ACL only provides that an unfair term is void. It is not illegal to include an unfair term in a standard form contract, and doing so does not attract a pecuniary penalty.

In 2018, the government conducted a review of the UCT regime for small business. That review did not involve any quantitative data gathering, instead relying on submissions from interested parties. Those submissions, according to the RIS, indicated that UCTs are still prevalent in small business contracts. In response to that feedback – and feedback on a range of other issues – the government has already committed to “strengthening” the UCT regime for small business. The only question is exactly what that “strengthening” will look like.

Framing the problem

As any good lawyer knows, you frame the question to suggest your desired answer.

Part 4 of the RIS is headed “legality and penalties”. It clearly identifies the problem: UCTs are still being used. Why? According to the RIS:

1. The current regime does not provide any effective deterrent to larger businesses using UCTs. Given that a UCT is legal until declared void, large businesses can effectively play the odds. The only immediate risk they face from including a UCT is that one day they might not be able to rely on it.
2. Nor is regulator intervention an effective deterrent. If a regulator threatens or commences proceedings, the business can simply amend the UCT so it is no longer unfair — and even if a declaration was made, the business could continue to use the term in other contracts. The RIS pointedly observes that two years after the JJ Richards case,[1] the ACCC was still investigating UCTs in the waste management industry.
3. The effectiveness of the regime is also hampered by a lack of awareness of it — but even so, in some cases small businesses would have “no choice” but to accept a UCT.

It is worth noting that these conclusions are based not on any quantitative data, but solely on submissions from motivated stakeholders, not all of which are made public.

“Options”

Having framed the issue as one primarily of deterrence, the RIS offers a number of different options to address the problems. Perceptive readers will already see where this is going.

Option 1: the status quo. According to the RIS, under the status quo smaller businesses may still face detriment from UCTs and regulators would need to invest heavily in compliance activities.

Option 2: Strengthened compliance and enforcement. According to the RIS, although the ACCC’s activities to date have had some positive results, the effect of this option alone on reducing UCTs is likely to be limited. The RIS also delicately notes that regulators “do not have infinite resources” and says that there would still be “other factors” that prevent small business from resisting UCTs.

Option 4: strengthened regulator powers. The RIS considers introducing infringement notices, but notes that “their effectiveness is limited by their purpose” (to be a quick enforcement tool). It also suggests regulatory determinations, and even suggests that small businesses would be “likely to benefit” from this option, but goes on to note various practical and theoretical objections to it.

So what’s the other option?

Option 3: making UCTs illegal and attaching penalties. According to the RIS, this option will have “the most significant deterrence”. This in turn would mean that businesses are more likely to take proactive action to remove UCTs from their existing contracts and templates, thus advancing the goals of the UCT regime. It would reduce the cost to small business of UCTs, and impose only “modest” expected compliance costs for larger businesses. Indeed, the only businesses who would incur further costs – “theoretically”, at least – are those who did not make changes when the UCT regime was introduced in 2016.

Although all four are presented as neutral “options”, it is not hard to see which way Treasury would like to jump.

Broader implications

It perhaps goes without saying, but outlawing UCTs would constitute a significant change to the regime. Depending on the structure of the provisions and penalties attached, it could have wide-ranging effects on relationships between many large businesses and their small business customers.  Introducing liability for civil pecuniary penalties would also shine a light on the many, as yet untested, uncertainties regarding the meaning and application of the UCT regime.

This would be significant enough, but the changes would probably not stop there. An innocuous sentence at the bottom of page 4 raises the flag:

Further, to ensure the UCT regime continues to be applied across the whole economy consistently, this RIS seeks views on whether any enhanced protections for small businesses should be extended to consumer and insurance contracts where appropriate.

Consistency between the consumer and small business UCT regimes is currently baked into the ACL (since the same provisions of Part 2-3 apply to both types of contract). It seems unlikely — as a matter of both policy and politics — that the Government would completely redraft Part 2-3 to toughen the regime for small business but not for consumers. And making UCTs illegal in consumer contracts would be a very significant change indeed.

The last word

All that said, this remains a Consultation RIS. Legislation has not been introduced, let alone passed. It is possible that after further submissions, behind the scenes lobbying, and the rest of the legislative process, the government will decide not to outlaw UCTs after all.

But if the government continues down this path: don’t say you weren’t warned.

[1] Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224.